For those of you who take this subject more seriously this is an interesting read.
Rupert Pennant-Rea in the FT today:
With apologies for asking the question yet again, what will the economic effects of the UK leaving the EU be? In the past fortnight, Brexit supporters have started to claim their optimism is being justified by a buoyant stock market and strong figures for jobs and shop sales.
If Britain in August participated in anything resembling political debate, “What was all the fuss about?” would probably have been the prevailing argument. The only honest answer to the question of Brexit’s effects is “Don’t know”, at least with any precision.
But the strongest clue has not come from the stock market or July’s unemployment and retail sales but from the currency markets. There, the message has been consistent and its implications have still to sink in.
On June 23, the day of the referendum, sterling reached a high of $1.50 and €1.31 shortly after polls closed. It then plummeted, and has since averaged at about $1.30 and €1.18. In trade-weighted terms, the pound is down more than 15 per cent from its level a year ago, when David Cameron, then prime minister, started the renegotiations that would lead to the referendum.
The foreign exchange markets are not always a reliable witness. They can be skittish, and their daily movements are sometimes impenetrable. But when rates move sharply and then settle for more than a month without second thoughts, their judgment shouldn’t be ignored. It is backed not by punditry but by many billions of dollars from in and outside the UK, so deserves more attention than it has been getting.
In essence, the currency markets are saying that all UK assets are worth less than they used to be. Land, property, companies, bank deposits, government debt — everything in the UK has been marked down against the rest of the world. Although the FTSE 100 has boomed, that is largely because its component companies earn most of their revenue and profits outside the UK.
Why do these international valuations matter to the average British household? Not many people are old enough to remember Harold Wilson’s fallacious message to the electorate when his government devalued sterling in 1967. “The pound in your pocket”, he claimed reassuringly, would not be devalued. Of course it was, and it has been again in the past two months, as every British holiday-maker abroad has already discovered.
But nobody should imagine that the traveller’s experience is an isolated exception. Indirectly, all Britons go abroad every day — to buy oil, food, clothes, Hollywood movies and much more. Imports are equal to roughly 30 per cent of UK gross domestic product, and if their cost goes up because of the vote to leave the EU, it is only a matter of time before everybody will be poorer.
The mechanism by which Britons will get poorer is through prices rising more than wages — in other words, a real-wage cut. That would cement the effects of a cheaper pound, and in a textbook world, sterling’s real devaluation would then make exports more competitive, so their volume would blossom while that of imports shrunk. In which case, Britain’s large trade deficit would fall; the economy would start to be rebalanced; in due course foreigners would be so impressed that they would again favour the pound, and its international purchasing power would gradually be restored.
Brexit: An experiment full of risk for British science
Can the UK craft new policies to keep its lead in research and development?
The snag with this happy prognosis is that it hasn’t happened before, at least not on a lasting basis. Seventy years ago the pound could buy $4.03, and it has been devalued periodically since then. Each devaluation produced a temporary fall in the real exchange rate, but it was not long before domestic costs started rising faster than the costs of Britain’s trading partners, and the advantage eroded.
Will this time be different? There is no reason to think so. In fact, a devaluation-powered improvement in Britain’s trade will be even harder to achieve if Brexit is reducing access to the EU’s single market and no alternative export markets have opened up to make good the difference. In which case, the message from the foreign exchanges is bleak. The British have become poorer than they were before the votes were counted on June 23, and that reality will become clearer as the months go by. Just when real incomes had started to recover from the sharp squeeze of 2009-14, they will be set back again.
The holidaymakers returning from abroad have already tasted what is to come. Whether getting poorer is what 52 per cent of the June 23 voters wanted or expected, it is what is happening.
The writer is a former deputy governor of the Bank of England and is chairman at Royal London